El Salvador Needs Ambitious Fiscal Reform, Says IMF

by Mike Godfrey, Tax-News.com, Washington

22 January 2015

The International Monetary Fund (IMF) has recently published a report on measures that El Salvador can implement to reduce its fiscal deficit.

The IMF said that El Salvador has made substantial progress on tackling poverty, but its economy is growing at the slowest pace in Central America and high fiscal deficits persist. Public debt has also been rising, reaching 60 percent in 2014, the highest in Central America. The Fund noted that there is broad social consensus on the importance of addressing the nation's fiscal problems, but views differ on the size, pace, and composition of the necessary fiscal adjustment.

IMF economist Bogdan Lissovolik and Mario Garza, the IMF's Regional Resident Representative for Central America, undertook an analysis of potential fiscal options. They said: "The solution certainly entails difficult social choices and we don't have all the answers – it will be for the Salvadoran people and their political representatives to decide this question. However, we believe that a gradual adjustment of 3.5 percent of gross domestic product, spread over the next three years, will bring public debt back down below 50 percent of GDP over the next ten years. This will significantly reduce fiscal risks and help ensure El Salvador maintains access to market financing on favorable terms."

"Certainly, this is a more ambitious fiscal plan than will be discussed in Congress in the coming months, in the context of the fiscal responsibility law. However, we believe… now is the time for a bolder objective."

"Fortunately, there are several options. For instance, El Salvador could aim to align its tax system with the region by raising the value-added tax rate and introducing a property tax. An important contribution could come from reversing the upward trend in the Government's wage bill and ensuring that all public subsidies are directed toward supporting the poor."

Lissovolik and Garza concluded: "The Government has a fresh opportunity after the 2015 March congressional election to act audaciously and decisively. Doing so will ensure a future of better growth and job security, improve living standards, and bring public debt down to safer levels."

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